Reflecting on 15 Years of Building Workplace Managed Account Programs
By Kelly O’Donnell, Executive Vice President, Head of Workplace, Edelman Financial Engines
Fifteen years ago, our firm began managing investment portfolios for workplace retirement plan participants. In the mid-2000s our personalized, objective investment advice for people with modest balances was an unprecedented idea.
After all, wasn’t investment advice a high-touch endeavor exclusively available to the wealthy?
We didn’t think so. In fact, we saw it as an imperative to help people make the most of their money. Hardworking Americans deserve the same type of comprehensive financial planning and independent advice that is available to high-net-worth individuals, and always in the best interest of the client. This was our mission from the beginning.
Over the last 15 years, our journey to fulfill that mission with millions of employees across the country has taught us a few things:
Scalable Advice Creates Access
Prior to my joining Edelman Financial Engines, I worked as a consultant at Cerulli Associates and co-authored research that posited that the future of our industry was in offering “scalable advice.” It was clear to me then that Edelman Financial Engines was a visionary in its desire and approach to deliver sophisticated, personal advisory services, rather than products, to help employees achieve their retirement goals.
Years later, this prediction has proven to be correct, and I’ve been fortunate to have a front row seat to see how this concept has evolved for the better over time. We have learned in the last decade and a half that financial advice is far more than just recommending an optimal asset allocation. We also know that the ability to personalize your portfolio delivers more appropriate retirement forecasts and better advice. Human behavior can hinder a secure retirement as much as poor investment decisions. To expand the availability of help, our priority continues to be making high-quality financial planning and advice accessible, engaging and impactful for plan participants.
Two QDIAs are Better than One
One of the biggest impediments to retirement security is simple inertia.
If you’re not forced to save or rebalance your investments, it is less likely that you will.
Thankfully, in 2006, legislation helped counter the worst of our instincts and accelerate our mission. That year, the Pension Protection Act enabled plan sponsors and their participants to default into Qualified Default Investment Alternatives (QDIAs) including managed account programs and target date funds
But if we are to address the $4 trillion retirement deficit crisis in the United States, our capabilities must go beyond 401(k) auto-enrollment on day one of a new job. We must use plan design to build more defaults into the workplace savings system that take advantage of what we know about human behavior.
Forward-thinking employers are recognizing that the complexity of employees’ financial lives changes throughout the course of their career and that target date funds aren’t the optimal solution for participants nearing retirement. As a result, more plan sponsors are utilizing two QDIAs in their plan – target date funds when participants are just starting out and their needs are relatively simple; and managed accounts for employees entering a more complex stage of life, usually between 40 and 50 years old. The latter group would then have access to personalized portfolios, retirement planning services and a financial advisor.
In addition, Edelman Financial Engines can now help plan sponsors improve the health of their plan by identifying at-risk populations – those paying too much in investment fees, taking too much risk, or lacking diversification – and safely defaulting them into the right service at the right time in their financial journey.
We are encouraged by the industry’s renewed innovation and interest in utilizing the powerful but simple concept of success by default. It is our hope that increased usage of QDIAs will help not only employees just starting out, but also millions of employees facing retirement today.
Computers Can’t Pat Your Back
As much as technology has helped us grow our business and help millions of American workers invest and plan for retirement, it only solves some of the problems we seek to address. Topics around money often strike volatile emotions in people, and we know from decades of experience that the best solution to reconciling these feelings is talking with an empathetic financial planner.
Personal finance is more about the personal experience than the finances. Even for a firm with Silicon Valley roots, we recognize that an algorithm won’t hug you when you’ve lost a loved one, high five you when you paid that last tuition payment or call to reassure you that you’re still on track after a volatile week in the markets. These human gestures carry more weight than even the most optimal investment portfolio. We believe it is the combination of technology and the human touch that makes the biggest impact.
We are grateful for the 1.2 million people who have entrusted over $213 billion* of their hard-earned savings with us; for the continued confidence of record keepers and consultants; and for the industry accolades we have received. We are especially proud of our strong relationships with employers and the resulting 96% retention rate. We have learned a lot helping retirement plan participants save and invest over the last 15 years and today we are more impassioned than ever to evolve and expand the financial help available to employees over the next 15 years and beyond.
Follow me on Twitter: @KellySODonnell
* AUM and client numbers quoted are as of September 30, 2019.
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